Why Not Buy the Dips?

Every so often we get a question asking why we don't "buy the dips" more when we are looking at possible stock plays and the answer is really simple. It's not "our" style. That isn't to say it's wrong, or that you shouldn't do it, we just don't find it works as well for us.

Let me explain. In the world of trading there are a zillion styles. Some ride momentum, some invest in fundamentals, some are pure daytrades while some are swing traders. Some play the technicals, some play buybacks. Some play splits. Some play the market "versus" the bond pits. We tend to play sector strength and individual breakout/breakdowns.

There is a lot of money to be made on 3,5, and 8 day reversal patterns. Watch the charts and you will see that stocks often reverse on those days, so buying in and catching the bounce works for many people. Just because we don't focus on that strategy doesn't make it wrong, it's just not "us". We like to look for break out or break down patterns, and try and correlate them to overall market directions.

Suppose you have a weak looking stock that is just barely hanging onto support.If the overall market puts in a huge day, chances are that stock will not violate it's support and fall. But on the other hand, if you find that weak pattern and then the market has a bad hair day, chances are pretty good that it will roll over and fall pretty hard. So, we short it. On the long side the theory works the same way. Find a stock looking to break out and couple it with a bounce or rising market. It will usually make it.

So, we don't have anything against working reversals, buying dips, etc. It's simply not our style, and lets face facts, some people do some things better than others. We aren't great at picking reversals, but we are pretty good at breakout/breakdowns. If you find yourself getting good at picking reversal plays, by all means go for it folks. In fact, shoot us a note and let us know how you're doing!

http://lb.bcentral.com/ex/manage/subscriberprefs?customerid=12826